REKOOP COMMENTARY: 2014 NATWEST LEGAL FIRM BENCHMARKING REPORT

 	
                              	
                                	
  

   REKOOP COMMENTARY:
   2014 NATWEST LEGAL FIRM BENCHMARKING REPORT
   	
  
   This report follows the first report last year co-written by Robert
   Mowbray of Taylor Mowbray and Steve Arundale, Head of Professional
   Services at Natwest. The purpose of the report is to examine the key
   financial drivers within the legal firms of Natwest’s client base and
   enable benchmarking through its helpful regional and quartile splits.
   This being the second report gives the first year of true comparables
   that paint an interesting picture now that the economic environment is
   showing tangible signs of improvement.
   	
  
   Who are Rekoop?
   Rekoop is the fastest growing specialist time capture software
   provider in the UK and boasts an enviable client base, ranging from
   some of the big global firms to regional five partner firms.
   Rekoop creates a tangible financial return following integration. By
   fully capturing just over an extra unit a day per user can result in an
   overall profit increase of 10%. The Rekoop solution captures a lot
   more than this!
   Rekoop has also recently announced a collaboration with Robert
   Mowbray of Taylor Mowbray, the author of this report, to offer legal
   firms a more holistic solution that uses software, policy and training to
   improve all the financial drivers of a law firm.
   The challenge facing firms and supported by the findings in the report
   are the very key measures of a law firm’s performance: profitability
   and cashflow. The key drivers of these explored in the report are the
   actual time captured, gearing, realisation rates, WIP and debtor days.
   All of these can be isolated specifically and improved with significant
   favourable effect on both profitability and cashflow.

Headlines/Themes
The report examines each of these in turn and looks into regional and
quartile variation on each where some interesting results become
apparent.
What is interesting is the movement on these from the prior year.
Although there are signs of economic upturn, the increased work
associated with economic recovery is not yet being fully recognised.
The report makes note of the requirement for a significant change in
thinking in future. It is no longer about cost cutting, but investing to
improve efficiency and good financial management.
This is likely to be the key differentiator of those whom succeed and
those who do not over the next business cycle.

Profits
Profit is the KEY measure of performance. There are still too many
firms focussing on fee income and not enough on profit, perhaps as a
result of this being more easily measurable.
Overall profit increased by 7% from 2012, largely driven by 3%
increase in fees. However, this has not been without cost, some 50% of
the increased fees has been used to fund more expensive overhead.
The median chargeable hours across the board is 1,000. This breaks
down into 4.4 hours per day that are chargeable. Is this truly the
amount that law firms understand their fee earners to be charging?
Gearing suggested of 3.125. It follows with the 3 x model that the more
that can be invested in the supporting overhead to provide a more
efficient base from which to support additional fee earners per partner
will significantly enhance the PEP. This of course will depend on the
existing structure of the team and the nature of the work won.
A significant variation on PEP at upper quartile level of approximately
10 x that than of performance at the lower quartile.
The median number of fee earners against total headcount is 49%,
increasing (perhaps surprisingly) to 55 % in the larger firms.
A key point made by Mowbray is the lack of a detailed time recording
policy in around half of all firms. Given the sensitivity of profit to
accurate and complete time capture, how can something so
fundamental be so overlooked?

	
  

 	
                              	
                                	
  

   There is also a lack of perceived congruence between profit sharing
   and partner performance, with just 36% of firms seeing a link between
   the two.

   Fees
   Moderate fee income increase of 3%. Arguably in line with inflation,
   therefore a nominal increase.
   Median fee per fee earner, on the basis of 1,000 chargeable hours
   recorded shows an average hourly rate of £140. With the typical
   realisation rate of 80% this suggests an average headline rate of £175
   per hour. The 1,000 chargeable hours suggests 4.4 hours per working
   day. Interestingly, this is consistent across regions and firm size. This
   represents utilisation of 55%. With realisation rates of 80% the
   effective utilisation goes down to 3.5 hours per day or 44% of working
   time. Is this truly reflective of working practices?
   The typical rule of thumb used is that a fee earner needs to generate
   three times their salary, with one third covering overheads so to
   achieve a healthy profit. This traditional model is still supported by the
   data where the upper quartile profit was 31% of fees.
   Mowbray outlines “Fees will be maximised if fee earners are recording
   all of their time. If clients cannot see the effort that goes into their
   affairs then they are unlikely to pay for this effort. Full time capture is
   the most basic thing that fee earners are required to do but most
   massively under-record their working time.”
   This has a beneficial impact on recovery rates as well as debtor days,
   thus improving BOTH profitability and cashflow.
   Though not mentioned in the report, it has been evidenced that where
   additional time has been recorded, this does not affect the realisation
   rate, which tends to remain consistent. As a result this extra time
   recorded typically flows through to the bottom line (less any
   incremental costs incurred in the recording/capturing of this time).
   This strong correlation is not typically looked at by firms, but they
   should consider the improved profitability, cashflow and management
   information arising from effective time capture - possible without the
   cost and hassle of capital expenditure and integration.
   A lack of time recording policy is cited as one of the main reasons for
   under-recording. The obvious other is giving fee earners access to the
   appropriate software with which to automate and capture as much of
   this as possible.

Lock-up
Larger firms slower on both WIP and debtor days, possible reflection of
more complex and fixed fee work that typically goes to the larger
firms.
Larger firms on 138 days = 20 weeks, ie. 38% of fee income! This is
similar to the upper quartile partner capital tied up in firms. On a £5m
turnover firm, this is the equivalent of £1.9m of fees tied up. What sort
of return is this tied up capital actually generating to Partners?
The expectation that neither are likely to markedly improve over the
current year, yet whom is managing this in each firm?
Key note is that firms have less confidence in managing lock-up than in
their ability to increase fees and profits.
What is not clear, but questioned is whether firms have the necessary
management information with which to manage lock-up. The results
and rates of confidence suggest that they do not.

Finance
Interesting to tie up the median lock-up position compared to partner
capital. 38% fee income in lock-up, whilst partner capital shows as
28% of fee income. It can be argued that all of partner capital is being
used to fund the working capital position, and an element of profit
required to top it up. This creates pressures on paying out partner
profits following year end.
Legal firms continue to be fairly prudent in their borrowings, preferring
to access partner capital accounts as opposed to bank facilities.

Summary
What is clear from the report is that there are a number of areas that
can be readily improved upon, without great upheaval: time capture,
realisation rates, WIP and debtor days.
Though not mentioned in the report, it has been evidenced that where
additional time has been recorded, this does not affect the realisation
rate. As a result this extra time recorded typically flows through to the
bottom line (less any incremental costs incurred in the recording/
capturing of this time). This strong correlation is not typically looked at
by firms, but they should consider the improved profitability, cashflow

	
  

 	
                               	
                                	
  

   and management information arising from effective time capture and
   possible without the cost and hassle of capital expenditure and
   integration.
   A lack of time recording policy is cited as one of the main reasons for
   under-recording. The obvious other is giving fee earners access to the
   appropriate software with which to automate and capture as much of
   this as possible.
   Time capture through use of innovative software through all devices
   can track 95% of all time expended; policy and training go to support
   and maintain user levels. The better use of software tracking time (and
   so cost and WIP), together with more detailed narrative, can increase
   the realisation rate, as well as improve WIP and debtor days. Improved
   management information through accurate and complete time capture
   gives finance and partners the effective tools for minimising effective
   lock-up.
   Although simple in solution, it is apparent from the report that this
   lack of pro-activity can be traced to weak decision making in the
   typical law firm. This may be due to ‘managing by committee’
   structures that are still in place at most firms. As a result, decisions
   that should be made for the good of the firm are deferred and
   circulated to committee, without any real ownership.
   What is likely is that over the next business cycle we will see the
   transformation from law firms to legal businesses in structure, process
   and behaviours. It is probable that those acting sooner rather than
   later are likely to be the success stories.

   Indicative Profitability Improvements
   Minimal expected increase in fee income of 3% (through additional
   time captured and policy) and increase in realisation rates from 80% to
   90% through better (automated) narrative and policy.
   Using the median figures from the report for Gearing, Chargeable
   Hours, Recovery rates and Profit Margins for small and large firms, the
   effect is significant. A small median firm would be 66% and for a large
   median firm 72% (before any incremental time capture costs).
   It is evident on reading both this report and the recent findings of the
   Top 200 survey in the Legal Insider that there are emergent trends in
   the sector. This is consistent with what has been happening in the US,
   where it is no coincidence that over 60% of their Top 200 have a

dedicated time capture system and their overall profitability outshines
that of the UK.
In the UK, per the Legal Insider, 30% of the Top 200 now have a
dedicated time capture solution. It is probable that these firms will
start pulling away from the rest, with only the next third actively
considering this solution able to keep in touch. The final third will face
significant challenges and risk being left behind as the legal sector
evolves from a collection of law firms to a number of legal businesses.

Benn Latham
CFO, Rekoop
benn.latham@rekoop.com

For more on the Rekoop/Taylor Mowbray collaboration:
http://bit.ly/PXq8uJ